55 T.C. 388">*388 The Commissioner determined a deficiency of $ 241.95 in petitioner's income tax for the calendar year 1964. He disallowed 1970 U.S. Tax Ct. LEXIS 22">*23 several deductions, 55 T.C. 388">*389 including the deduction for additions to bad debt reserves, claimed by the petitioner for the taxable year in issue. These adjustments had the effect of increasing petitioner's taxable income for that year. The only question remaining for decision is whether section 1.593-5(b)(2), Income Tax Regs., permits the petitioner to credit part of this increase in its taxable income to its bad debt reserves, and thereby claim a deduction under section 593, I.R.C. 1954.

FINDINGS OF FACT

The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.

During the taxable year in question Ohio Pike Savings & Loan Co. (hereinafter referred to as petitioner) was a domestic building and loan association within the meaning section 593, I.R.C. 1954. Petitioner was organized under the laws of the State of Ohio. It was incorporated in September 1958. At the date of the filing of the petition in this case, petitioner's principal office and place of business was at Tobasco, Clermont County, Ohio. It filed its corporate income tax return (Form 1120) for the calendar year 1964 with the district director of internal 1970 U.S. Tax Ct. LEXIS 22">*24 revenue, Cincinnati, Ohio. Petitioner was on the cash basis of accounting.

On its tax return for 1964 petitioner reported taxable income of $ 733.18 on which it paid income tax of $ 161.70. ^{11970 U.S. Tax Ct. LEXIS 22">*25} In computing its taxable income for the year in issue, petitioner claimed the following deductions which were subsequently disallowed by the Commissioner.

An additional tax of $ 1,220.75 was due when the total amount of these deductions, $ 5,550.70, was restored to income. On September 11, 1968, petitioner executed a "Waiver Of Restrictions On Assessment 55 T.C. 388">*390 And Collection Of Deficiency In Tax" (Form 870), and paid the additional tax of $ 1,220.75 thereunder.

In addition to the above-listed deductions, petitioner claimed a deduction of $ 1,099.77 for bad debts. Schedule F of petitioner's tax return disclosed that petitioner used the reserve method of accounting for bad debts and that it was for additions to these reserves for bad debts that petitioner claimed this deduction. Schedule F read as follows:

As is shown in Schedule F, the amount of the deduction for allocations to bad debt reserves for qualifying loans was computed as 60 percent of taxable income.

The petitioner did not claim a deduction in 1964 for any addition to a bad debt reserve for nonqualifying loans.

During the taxable year in question the petitioner maintained three different reserve accounts for bad debts on its general ledger. The reserve accounts were: (1) A general reserve for bad debts, (2) a qualifying loan reserve for bad debts, and (3) a supplemental reserve for bad debts. Petitioner did not make any credits for 1964 to either its general ledger account for the qualifying loan reserve or its general ledger account for the supplemental reserve. There was, however, an "entry" of $ 600 to the general ledger account for the general reserve for bad debts, but the record does not disclose the nature of this entry.

Furthermore, the record does not disclose to what accounts on its general ledger, if any, petitioner credited the amounts said to be allocated to bad debt reserves in Schedule F of its tax return for 1964. 1970 U.S. Tax Ct. LEXIS 22">*27 Nor is it shown for what purposes these accounts, if any did exist, were used.

The balance sheet submitted as a part of petitioner's 1964 tax return read as follows: 55 T.C. 388">*391

The balance sheet carried an entry of $ 139,900.66 under "Legal" reserves. The total balance of the bad debt reserves shown in Schedule F, as of January 1, 1965, was $ 138,200.89.

In his deficiency notice to the petitioner, the Commissioner disallowed the amounts deducted for additions made to bad debt reserves. The Commissioner stated therein:

It is determined 1970 U.S. Tax Ct. LEXIS 22">*28 that the deduction for bad debts on the reserve method in the amount of $ 1,099.77, claimed in the 1964 income tax return is unallowable. The amount claimed was not reflected on the regular books of account as required by sections 166(c) and 593 of the Internal Revenue Code of 1954 and the regulations promulgated thereunder.

The issue raised at the Appellate hearing requesting a deduction for bad debts in an amount equal to 60 percent of corrected taxable income after taking into account certain agreed adjustments has been given careful consideration and it has been determined that such deduction is unallowable since no amount was initially credited to the proper reserves as required by section 593 of the Code. * * *

Based on the contention that it may make such a subsequent adjustment credit to its bad debt reserves, petitioner claims a refund from the $ 1,220.75 paid under the September 11, 1968, "Waiver Of Restrictions On Assessment And Collection."

OPINION

Petitioner, a domestic building and loan association within the meaning of section 593, I.R.C. 1954, ^{31970 U.S. Tax Ct. LEXIS 22">*31 1970 U.S. Tax Ct. LEXIS 22">*32} used the reserve method of accounting for bad debts. On its 1964 return, it claimed various deductions (unrelated to bad debts) 1970 U.S. Tax Ct. LEXIS 22">*29 in the aggregate amount 55 T.C. 388">*392 of $ 5,550.70, which the Commissioner disallowed. Petitioner did not dispute that disallowance and, in fact, paid that portion of the deficiency ($ 1,220.75) attributable to the disallowance of such deductions. In addition to those items petitioner claimed a deduction of $ 1,099.77 on its return as an addition to its "Qualifying reserves" for bad debts. The record discloses that petitioner in fact never made any such addition to the reserves on its books, and the Commissioner therefore disallowed the deduction. It is clear that the Commissioner's action in this respect was correct since section 1.593-5(b)(1) of the regulations requires that the addition to the reserves must be credited "by the close of the taxable year, or as soon as practicable thereafter." Although petitioner initially contested the disallowance of the $ 1,099.77 deduction in its petition filed herein, it has since abandoned its objection to that adjustment. The only matter now in dispute is whether, as a consequence of the increase in its "taxable income" by the amounts of the disallowance of the foregoing deductions 55 T.C. 388">*393 ($ 5,550.70 and $ 1,099.77), ⁴section 1.593-5(b)(2) of the regulations 1970 U.S. Tax Ct. LEXIS 22">*30 ^{51970 U.S. Tax Ct. LEXIS 22">*33} permits the taxpayer to recompute its deduction for additions to its reserves (measured by a percentage of that increase in its taxable income). We hold that since the original deduction for addition to the reserves was fatally defective, petitioner is not entitled to a deduction for "subsequent adjustments."

The 1970 U.S. Tax Ct. LEXIS 22">*34 underlying assumption of section 1.593-5(b)(2) is that there was initially a valid addition to the reserves and that a subsequent adjustment in the taxpayer's taxable income may permit or require that there be a corresponding increase or decrease in the amount of that addition. It was clearly never the purpose of the regulations to permit a taxpayer to pull itself up by its bootstraps and obtain a deduction for an addition to its reserves where there has been a fatal failure to comply with the accounting requirements of the statute and regulations in the first place. The language of the regulations is clear enough: It provides that where an adjustment has the effect of permitting an increase or requiring a reduction in the amount claimed on the return as an addition to the reserve, "then the amount initially credited to such reserve for such year pursuant to subparagraph (1) of this paragraph may have to be increased or decreased, as the case may be, to the extent necessary to reflect such adjustment." (Emphasis supplied.) Obviously, the words "initially credited" contemplate that the amounts were properly credited in the first instance; and unless an addition to the reserve has 1970 U.S. Tax Ct. LEXIS 22">*35 been properly credited, there is no basis upon which to compute an upward revision of such addition.

Section 593(c) sets out the accounting requirements of the statute. It states that a taxpayer which seeks to take advantage of the reserve method of accounting for bad debts "shall establish and maintain" three different reserves: A reserve for losses on qualifying real property 55 T.C. 388">*394 loans, a reserve for losses on nonqualifying loans, and a supplemental reserve for losses on loans. In implementing these provisions, section 1.593-7(a), Income Tax Regs., requires that accounts for the bad debt reserves established in accordance with section 593(c) be set up and maintained as a permanent part of the taxpayer's regular books of account or in a permanent subsidiary ledger.^{61970 U.S. Tax Ct. LEXIS 22">*37} These accounting requirements are rigid conditions, and the reasons therefor were outlined in Leesburg Federal Savings & Loan Association, 55 T.C. 378">55 T.C. 378, 55 T.C. 378">386-387, ⁷ decided this day. Moreover, as already noted, section 1.593-5(b) requires that the additions to the reserves be credited by the close of the taxable year or as soon as practicable thereafter. Indeed, failure to make timely additions to the reserves has been 1970 U.S. Tax Ct. LEXIS 22">*36 regarded as fatal, regardless of whether deductions would otherwise have been permissible. Cf. Commercial Savings & Loan Association, 53 T.C. 14">53 T.C. 14; Rio Grande Building & Loan Association, 36 T.C. 657">36 T.C. 657; Colorado County Federal Savings & Loan Association, 36 T.C. 1167">36 T.C. 1167, affirmed per curiam 309 F.2d 751 (C.A. 5).

Petitioner does not contend that it fulfilled the accounting requirements of the Code and regulations, and the record affirmatively establishes that it did not do so. It therefore could not rightfully have claimed any deduction on its returns for any addition to its reserves. The requirements of the statute and regulations were designed to insure that the deduction is taken only for actual additions to genuine bad debt reserves, see Leesburg Federal Savings & Loan Association, 55 T.C. 378">55 T.C. 386-387, and failure to comply with those requirements is decisive against the taxpayer. Section 1.593-5(b)(2) of the regulations is merely a limited exception 1970 U.S. Tax Ct. LEXIS 22">*38 to those requirements, and we think it clearly presupposes compliance with the statute and regulations in all other respects. Thus, a taxpayer that desires to invoke the authority for an upward revision of the amount initially credited to its reserves must first have complied with the requirements of the statute and regulations in respect of the addition that is sought to be revised.

55 T.C. 388">*395 Petitioner argues that its case is indistinguishable from one in which a taxpayer makes no additions to bad debt reserves because no taxable income is reported from which to deduct any amount for such additions. If it should occur at a later date there was, in fact, taxable income in that year, petitioner argues, a subsequent adjustment would be allowed under section 1.593-5(b)(2), Income Tax Regs. But this simply is not petitioner's case. The Code and the regulations formulate a comprehensive scheme of reserve accounting for bad debts. The taxpayer that wishes to take advantage of reserve accounting for bad debts must adhere to all the rules of the scheme. This petitioner clearly has not done.

Decision will be entered for the respondent.